Increasingly, building components such as facades, kitchens and solar panels are being offered as a service ("as-a-service"). The providers of these services are struggling with unprecedented price increases of raw materials in construction. The legislature provides very limited scope for passing on price increases in ongoing contracts. What matters in this context is what type of contract is used for an as-a-service.
As-a-service service is relatively new in construction
As-a-service is a relatively new form of service in construction where the contractor remains involved in the work even after completion. An example is when the contractor installs sensors in a smart building during construction that then monitors maintenance and use. The use of the sensors is then offered as a service, possibly combined with a maintenance obligation. Incidentally, as-a-service services have been common in the Civil Engineering (GWW) industry for some time.
Legally, it has not yet been fully crystallized what type of agreement fits an as-service service. Different models with characteristics of contracting, rental, lease and assignment are circulating. Among other things, what type of agreement is used is important for the answer to the question of whether price increases can be passed on.
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Legal regulations in the event of price increases
Especially for the building contract, there is a specific legal regulation on passing on cost-increasing circumstances (such as price increases). This requires that price increases occur after the conclusion of the contract, which are not attributable to the contractor and which the contractor did not have to take into account when concluding the contract. However, this rule only applies to building contracts. For rental agreements, lease agreements or assignment agreements, this rule does not apply.
However, all contracts are subject to the general statutory provision on contingencies. Under that provision, the court can modify a contract and thus, in the case of as-a-service contracts, increase the monthly amount payable if unforeseen circumstances are involved:
- that were not factored into the contract (whether the parties could have foreseen the circumstances is irrelevant);
- which are not for the account of the party relying on them; and
- as a result of which the other party cannot reasonably expect unchanged maintenance of the agreement.
This regulation is intended for exceptional situations and in practice we see that the regulation is not or hardly applied in commercial relationships.
What type of agreement applies to as-a-service contracts?
Thus, in order to pass on price increases, it is most advantageous for a contractor in the current market to make a split between the work to be completed and the service to be provided. This can be done through separate agreements but also through a single agreement. In the latter case, a mixed contract is created so that two different regimes (contracting of work and rental) apply to different parts of the contract. However, this is not so simple in the case of this type of service because in that case there must also be a split in the price between the work to be realized and the service to be provided. In addition, in an as-a-service construction, a legal structure will have to be set up to prevent the ownership of the realized work from passing to the client.
Consider, for example, solar panels delivered and installed by a contractor whose use and maintenance is offered as a service. Without further agreements, the owner of the property on which the solar panels are installed would become the owner of the solar panels when that is not the intention and the client has not paid for them.
Make contractual arrangements
As mentioned above, it is complex and administratively costly to frame an as-a-service as a contracting agreement. It is therefore recommended that as-a-service contracts include agreements on how to deal with price increases during the term of the contract. The legal rules do not provide enough for such an arrangement for as-a-service contracts and if nothing is arranged then a contractor/service provider will not be able to pass on price increases.
For example, for making agreements about passing on price increases, consider recording:
- of which materials price increases are passed on;
- from what percentage of price increase the contractor may pass on; and
- What distribution key is then used.
